Recently, we find an wallpaper setting issue on windows 7 and windows server 2008 R2.
You want to set a picture on the computer as a background and it doesn't work. And you can only change it to a solid color.
The following KB article was also tried, but the wallpaper never applied:
The "Desktop Wallpaper" Group Policy setting is not applied in Windows 7 or in Windows Server 2008 R2
After some research, data collection and troubleshooting, we get a solution:
Please follow the steps below to resolve it:
1. Delete or rename the file
Ø Open an Explorer window.
Ø Cick the left mouse button in the Address/Breadcrumbs box. It will change to a path.
Ø Copy the path %USERPROFILE%AppDataRoamingMicrosoftWindowsThemes and paste it in, replacing what's there. Hit enter.
Ø Explorer will go to the location of the file TranscodedWallpaper.jpg.
Ø Delete or rename the file TranscodedWallpaper.jpg..
2. Apply the wallpaper again.
In this way, wallpaper can successfully applied.
Some reference from technet forum:
Edit: We have released a Knowledge Base article for this issue, see details in http://support.microsoft.com/kb/2504610/en-us